The denial rate for new home mortgages in Birmingham remains at an elevated level due to tighter lending restrictions, lower home prices and several other factors.

But a review of federal mortgage data shows borrowers in some cities around Birmingham have it much worse than others.

The Birmingham Business Journal analyzed Home Mortgage Disclosure Act filings compiled in Compliance Technologies’ Lending Patterns database to track the trends in the lending levels for metro Birmingham and 21 of the largest local cities.

Overall, 13.14 percent of home purchase applications in the metro were denied in 2011 – the latest year data is available. That’s up from 11.75 percent during the housing boom in 2005.

But a closer look at the numbers shows many cities are facing denial rates considerably higher than the metro’s average.

Rural cities in the region have it particularly tough compared to suburban areas.

Experts say those high denial rates could mean elevated housing inventory, lower home prices and a slow recovery for the real estate market in those areas.

Montevallo and Pell City had the highest percentage of denied applications, at 32.7 percent and 23.9 percent, respectively. Residents of wealthier suburbs like Cahaba Heights, Vestavia Hills and Mountain Brook found it easier to get a mortgage in 2011, with the lowest denial rates of 5.5 percent, 7.5 percent and 7.7 percent, respectively.

Mortgage lenders and real estate executives say a number of factors are to blame for the high denial rate in Birmingham’s rural areas.

“Montevallo and Pell City tend to be more rural areas where jobs are fewer and income may be less,” said Ty Dodge, president and CEO of RealtySouth. “Whereas, there’s probably more stability in jobs in Cahaba Heights and Vestavia Hills.”

Scott Dickey, president of the Mortgage Bankers Association of Alabama, said the unemployment rate and income levels of the areas are key factors to consider when looking at the denial rates in different markets.

“Montevallo and Pell City are more blue-collar cities. If the economy is not strong, their workforce hours may be reduced from where they were,” he said.

Another factor is the influx of new rural subdivisions during the housing boom.

He said the housing supply was overbuilt in the outlying rural markets and couldn’t be absorbed in the downturn of the economy.

On the other hand, housing markets in Homewood and Vestavia Hills fared much better because the land is mostly built out and had few new subdivisions being developed.

Dickey said higher denial rates in a particular area mean the housing inventory is not being purchased, leaving elevated inventory that drives down real estate prices.

Those lower home prices can also result in higher denial rates, potentially creating a problematic cycle for the area.

Erin Tatum, owner of Classic Home Mortgage and a board member of the Alabama Mortgage Brokers Association, said Birmingham’s overall rate of denials has increased due to the strict overlays the lenders have put on underwriting guidelines.

“In 2005, anyone who had a pulse and was breathing could get a mortgage loan,” she said. “When the housing bubble burst, the underwriting guidelines became very strict because everyone was scared of the housing crisis. In the last few years, we have seen the lenders loosen up a bit; and instead of being overly cautious, they are being conservative, yet still achieving lower risk loans.”

Tatum said rural areas, like Montevallo, have higher home purchase denial rates because there’s less accessibility for potential home buyers to learn about the loan process.

“I think some of the outskirt areas aren’t as familiar with what it takes, so therefore, they’re being penalized because people aren’t going to those outskirt areas to help educate them,” she said. “What I’ve seen is someone who lives closer to the city usually has more resources because they’re going to have first-time homebuyers seminars that they know about and things of that nature.”

A previous BBJ story showed that mortgage lending in the metro hasn’t recovered from the recession. Originations for purchases have declined by more than 58 percent since 2005, due to heavy regulation on mortgage lending and lower demand for loans. The number of applications for home purchases fell by more than 64 percent from 2005 to 2011.

Since the total number of applications are down, experts say the number of denials for home purchases are also reflecting a downward trend. The number of denials in the metro were 2,598 in 2011, a 60 percent dip since its 6,532 peak in 2005. The number of denials have been steady in the mid 2,000s since 2009.

But improvement could be on the horizon, local experts say.

Dodge said credit score requirements are easing a bit, which makes it more affordable to qualify for loans.

He also said as the market is expanding, real estate agents are seeing a lot of homes sold in the mid-to-upper bracket, where buyers have higher incomes, so they’re more likely to qualify for a loan. That’s a big change from the environment during the downturn when agents were selling mostly foreclosures and few upper bracket properties, RealtySouth’s Dodge said.

Dickey said as housing prices dropped during the recession, the appraised values on homes came in lower because there were few sales to support the sellers’ prices. He said if the customers didn’t have the extra cash to put down and the sellers weren’t willing to drop their prices, it caused denial rates to rise.

However, Dickey expects the 2012 denial levels to look much better than the 2011 figures. He said housing prices have stabilized in the last couple of years, so that’s being reflected in the numbers.